China's Gome: Property JV plan on hold for now

PollyHui

-- Gome puts on hold a plan to form joint venture with Huang Guangyu companies to develop and invest in China properties

-- Company cited current market conditions as one reason for the decision

-- Gome Share price plunges in line with market volatility and as investors remain concerned about company's foray into property development

(Recast 1st paragraph; adds more detail on the proposed joint venture in the 3rd and the 6th paragraphs; share price following Gome announcements in the 4th and 5th paragraphs; analyst's quotes in the 7th paragraph)

HONG KONG (MarketWatch) -- Gome Electrical Appliances Holding Ltd. (493.HK) on Monday failed to calm investor concern about its planned venture into China's property sector when it put on hold a CNY200 million proposal to develop and invest in retail projects with companies owned by jailed founder Huang Guangyu and his associates.

Gome is putting execution of the proposal on hold after considering factors including current market conditions and the timing of potential property projects under the joint venture, the Hong Kong-listed company said in a statement Monday. It didn't specify other reasons.

Gome announced on Sep. 27 that it has entered into an agreement for a proposed 50-year joint venture with Beijing Eagle, a property developer, and Beijing Gome, an electrical appliances retailer--both owned by Huang--to develop and invest in retail properties in lower-tier cities in China. Under the agreement, the joint venture's registered capital of CNY200 million will be held 45% by Gome and 55% by Huang companies.

Shares in Gome plunged 31% to HK$1.83 over the two trading days after the news, as investors questioned the timing of the deal amid the current tightening environment for mainland property developers and the heavy involvement of Huang, who since May 2010 has been serving a 14-year prison sentence for bribery and other illegal business practices while Gome's controlling shareholder. Credit Suisse downgraded the company to Neutral from Outperform on Wednesday.

Shares in Gome rebound briefly following Monday's announcement, although they quickly headed back into the red late morning, in line with overall market volatility. At midday, the shares had fallen 7.1% to HK$1.70, against a 5.0% fall in the benchmark Hang Seng Index.

Gome said it will re-evaluate the proposal and continue to study how to acquire attractive retail, storage and logistics properties in second- and third-tier cities. The company said the plan will help to increase group margins by having its stores in self-owned properties.

"There are so many risks in developing properties in China under the current environment. The joint venture vehicle is not listed and this leads to lots of worries and speculation on corporate governance and accounting issues, especially since Huang is involved," said David Lau, an analyst covering the company for UBS.

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